Unilever Wagers Billions on India Economic Revival

In 1888, when Queen Victoria ruled India, the company that would become Unilever decided the country was the future. More than a century on, it’s staking $5.4 billion that it still is.

The Anglo-Dutch maker of Dove shampoo and Lipton tea, successor to one of the first multinationals in India, plans to spend as much as 292 billion rupees ($5.4 billion) to increase its control over Indian unit Hindustan Unilever Ltd.

The early entry gave Unilever, based in London and Rotterdam, a lead on rivals such as Procter & Gamble Co. in the world’s second-most populous country. The latest investment would help it gain greater influence over a business that boosted earnings by 37 percent last year selling brands tailored to Indians, such as Fair & Lovely skin lightening cream and shampoo sachets at about 3 rupees (6 cents) apiece.

At stake is a $42 billion market for beauty and home-care products and packaged foods where competitors from P&G to Colgate-Palmolive Co. are making a bigger push to win shoppers. Hindustan Unilever has so far held its ground as India’s biggest consumer-products maker by catering to local tastes and building a distribution system of 6.3 million sales outlets, more than double P&G’s 2.5 million.

Unilever’s latest investment in India comes as economic growth is weakening and government bureaucracy slows the expansion of international companies from Wal-Mart Stores Inc. to Ikea. India’s economy expanded 5 percent in the year through March, the national statistics agency estimates, versus an average of about 8 percent annually for the past decade.

‘Grinding Halt’

“An Indian economy growing at 5 to 6 percent is not enough,” Unilever Chief Executive Officer Paul Polman said in a December interview in New York. “India’s problem is India itself. The government has come to a grinding halt on making the reforms that need to be done.”

To boost its stake in Hindustan Unilever from the 52.5 percent it owns to its target of 75 percent, the Anglo-Dutch parent is offering 600 rupees a share, 21 percent above the Indian unit’s closing price on April 29, the day before the offer was made.

Shares of Hindustan Unilever, based in Mumbai, rose 17 percent to 584 rupees on April 30. Unilever fell 0.4 percent to 32.3 euros in Amsterdam April 30, trimming its gain this year to 12 percent. P&G has gained 13 percent this year.

“We wish Unilever had done this deal sooner, because the share price has been a strong performer, but in our view it makes a lot of sense both strategically and financially,” Graham Jones, an analyst at Panmure Gordon in London, said in an April 30 note.

‘Obscene Valuation’

Hindustan Unilever shares dropped as much as 2.3 percent in Mumbai trading today. Traders were today buying the largest amount of bearish options on Hindustan Unilever in three months to hedge against declines in the stock.

If completed, the transaction will be Unilever’s biggest since its 2000 purchase of Best Foods Ltd. Nitin Mathur, an analyst at Espirito Santo Investment Bank, cautioned that even at the “obscene valuation” Unilever is putting on the Indian unit, some investors may refuse to tender their shares. A Unilever spokeswoman says the company expects to be successful, and that the offer provides a good return for its shareholders.

Part of Hindustan Unilever’s strategy has been to convince villagers to use products such as shampoos in place of home-made herbal powders. Selling items like detergent in sachets convinced millions of poor Indians to try the company’s products, according to Ina Dawer, an analyst at researcher Euromonitor International.

Whitening Scrubs

“That actually helped Hindustan Unilever attract rural customers -- to make them switch from traditional alternatives to branded products,” she said.

To broaden its reach, the company started hiring rural women in 2000 as brand ambassadors who travel to sell directly to nearby areas, a program that now spans 130,000 towns. More recently, it has offered urban consumers higher-end brands such as TRESemme shampoo and more expensive whitening scrubs and creams under the Pond’s and Lakme brands. It’s also boosted its marketing budget to about 15 percent of sales from 8 percent in 2009, Deutsche Bank AG estimates.

That strategy has helped Unilever fend off P&G, the world’s biggest consumer-goods maker, as well as smaller global competitors such as Reckitt Benckiser Group Plc.

Bill Ackman

Cincinnati-based P&G, which established its India business in 1964, has gradually boosted its share of the personal and beauty care segment to 5.2 percent in 2012 from 4.6 percent in 2007 by introducing Indians to global brands such as Olay lotions, according to Euromonitor. That still trailed Unilever’s 32 percent share in the sector.

P&G, the maker of Tide detergent, Pampers diapers, and Pantene shampoo, is preoccupied with trying to reinvigorate its business in more mature markets, said Jeff Stent, an analyst at Exane BNP Paribas in London. P&G CEO Bob McDonald has said he will cut $10 billion in costs through 2016 and renew focus on the company’s leading businesses. McDonald has been under pressure from activist investor Bill Ackman, who bought a $1.8 billion stake last year and pushed to replace him.

Unilever’s Indian strategy hasn’t been foolproof. Sales of its low-cost Wheel detergent are growing at a slower pace due to “increasing competitive intensity” from smaller players, Hindustan Unilever CEO Nitin Paranjpe said in a January conference call. The share of privately held Rohit Surfactants Ltd.’s Ghari detergent doubled to 6.1 percent in the five years through 2012, Euromonitor estimates.

British Soap

“Unilever’s lost some market share in detergents, likely because of Wheel,” said Deutsche Bank analyst Harold Thompson. “Competitors have improved substantially.”

Unilever’s Indian business started more than a century ago when British soap maker Lever & Co. introduced the Sunlight brand. India is now Unilever’s third-largest market, accounting for about 8 percent of sales, according to Bernstein Research. On average, its products command a 40 percent market share in India, higher than in any other country where it operates, Liberum Capital estimates.

The plan to boost its stake comes on the heels of Unilever’s January decision to increase the royalty the Indian unit pays to 3.15 percent of revenue, up from 1.4 percent, in phases over five years.

Regardless of how fast India grows, “there are huge volumes here and that’s what they want,” said Sachin Bobade, an analyst at Brics Securities Ltd. in Mumbai. “Unilever always intended to own as much of this company as possible and they’re paying a huge premium for it.”